A Guide to Construction Budget Management
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How to Create Success in Construction Project Budgets

Construction budget management is key to any construction project. The difference between successful and poor budget management can be make or break for many construction companies, so ensuring buffers are allocated for setbacks, while also maximising profit, is a must.

Quantity surveyors, financial teams and estimators involved in the budget creation and planning process require accurate and up-to-date information to be able to produce valid estimations. But correctly documenting everything can be incredibly tricky and time-consuming. Thanks to construction ERP software available from RedSky, budget management has never been more efficient.

 

Your Construction Budget

Your construction budget estimates the expected costs of a construction project. Outlined at the beginning of a project, construction budgets allocate both expenses and resource for the estimated length of the project.

A construction budget not only provides a practical plan for approaching any construction project, but it also communicates to key stakeholders, both internal and external, the intended cost in time and money that a project is expected to take.

Why is Construction Budgeting Important?

Managing your budget successfully for any construction project is vital. Without successful management, complications and obstacles can become even costlier.

From stakeholders to your end-users, successfully managing a construction budget ensures not only efficient use of money in its literal sense, but it ensures project timelines can be met, key for internal and external stakeholders, and ultimately, the end user.

What Should be Included in Your Construction Budget?

While every construction business and job will require a slightly different approach to budgeting due to the size or the nature of the project, you should be considering:

  • Pre-construction costs
  • Labour costs
  • Project management costs
  • Material costs
  • General operational costs
  • and buffer budget.

Step-by-Step Guide: How to Manage Budget for a Successful Construction Project

With financial obligations from both contractors and clients, a construction project budget must be watertight. Planning for a successful budget relies on multiple components, a lot of evidence, and expertise to make business-critical decisions. With software and technology available to support estimators and quantity surveyors, these offer excellent insight for current and future budget-related decisions.

Step 1. Pragmatic Approach

The first step in successfully managing a construction budget is to take a pragmatic approach. Where data and financial decisions are concerned, they must be accompanied by strong evidence. Acting on hunches or assumptions can be incredibly costly, even if they might have worked in the past. Of course, utilising hindsight and evidence from previous projects can be insightful when sudden decisions are required. Usually, this would fall on an individual who witnessed the challenge and success, or failure, following on from it.

With the construction industry aiming to see a growth of 4.3% per annum until 2025 and an expectation to lower costs using technology, it has never been more important to make the right decisions that see a return on investment and increased profit margins. Thankfully, record-keeping and previous project data are accessible on ERP systems, meaning decisions don’t need to be taken from memory and can be backed up using evidence. Likewise, where decisions have previously been made but indicate a negative correlation with cash flow, it can indicate the need for an alternative solution.

Step 2. Margin-Based Reporting

The next step is to consider margin-based reporting. Exploring revenue metrics is a great way to identify whether budgets have been effective for the completion of previous projects. Larger profit margins could inform you about a project’s success. Utilising ERP software can provide greater insight into potential avenues for growth while also indicating areas where smarter operating costs could be implemented.

As well as offering greater insight, ERP software allows quantity surveyors to review real-time data. Without a clear view of cost progression and original estimates, it can severely distort a budget, often leaving companies with little to no forewarning before an overspend occurs. ERP software simplifies this completely by housing all relevant project data in one area. That way, it offers transparency over total spending and the budget remaining.

Margin-based reporting also enables project managers to make quick and informed decisions where budget relocation may be required. Through the dashboard display, a full breakdown of figures, taking into account profits, losses and cash flow, enables real-time insight into the cost of the project. For example, where part of a project has been completed and cash remains, this can be utilised for another area.

Step 3. Contingency Planning

Catering for the unknown is challenging, especially when there are no clear indicators for how smoothly a project will run. Based on previous construction projects with similar conditions, estimators and financial teams can suggest a buffer that accounts for any delays or defect costs incurred on similar project types. To achieve this, each stage of the project will need to be broken down and analysed.

A certain level of foresight also coined the known unknown, can be expressed by budget managers, and put forward as part of the contingency plan. Not only will this keep client expectations steady, but also offers transparency for project managers too.

Typically, considerations should be taken for labour shortages, changes to health and safety legislation and challenges that arise with sustainability. On a site-by-site basis, quantity surveyors will also identify structural, environmental and geographical challenges.

The greatest trouble is normally through unknown challenges that are swayed by issues out of your control. For long-term projects planned years prior, price fluctuations, disruption to material delivery or natural disasters can mean delays. Ultimately, this can cost money.

Luckily, for risks such as known staffing issues or unplanned price increases from third parties, ERP software can support your project. All costings, your total spend and the remaining budget can be viewed on the dashboard, allowing you a total overview of all finances and budgets for the entire project. Disruptions occurring earlier in the project can inform practices moving forward, meaning more caution is placed when money could be saved. Likewise, any budget saved earlier on in the project can be allocated later on in the instance that any challenges, such as delayed deliveries, arise.

Step 4. Task Categorisation

Segmenting tasks into set categories, also known as work breakdown structures (WBS), can save time and offer better visualisation for project managers. As well as breaking down all stages of a construction project, it allows an overall view of the steps taken across each task group. Organising pre-empted tasks in such a way will allow for greater preparation before work has even begun. Not only does this afford decision-makers more insight into where money is being spent, but it also enables tasks to be prioritised to save money as well.

The use of real-time reporting means site walks, using drones and helmet recordings, and task management, through collaboration software, can all be done without leaving the office. Before 2021, approximately 76% of construction leaders were likely to invest in at least one digital innovation; using an ERP could offer all the digital solutions you need. Good software can offer a range of modules, including analytics and work breakdown structure (WBS). For project managers, this information can provide great value for analysing costs that have been over or under-budgeted, as well as tasks that could be resolved more efficiently.

A solution for information management and project collaboration is the answer when it comes to task categorisation. Where there are multiple moving parts and external contractors on-site, this software ensures contractual obligations are always met as project managers can access real-time information.

In instances where it is safe and possible to do so, it can also act as a tool to save money and increase profit margins overall. For example, there may be occasions when tasks can be completed ahead of schedule without compromising health and safety in the workplace. Additionally, alongside inflation, material price or availability could change midway through a project meaning a cheaper alternative solution can be used. Ensuring tasks are completed on or ahead of time reduces the chance of costly delays. Likewise, utilising this software offers preemptive time-keeping measures such as managing site diaries for material delivery and work commence dates for contractors.

Step 5.   Rationalise Each Item

The last step to consider in your construction budget management is to rationalise each item. Every budget requires rationale. As well as returning investment and increasing profit margins, great care and attention must be paid to each stage, especially where health and safety requirements are concerned. For stakeholders and those in board-level positions, each step and task will need to be scrutinised and agreed upon. This is where a pragmatic approach will also support decision-making.

It’s good business acumen to investigate alternative methods when reducing costs. Hunches aren’t solid evidence when it comes to cost-saving techniques. For many construction companies, there’s a fine line between balancing profit margins and investing in sustainable and affordable technologies. The example of sustainable construction is one that construction companies need to rationalise more of, especially with larger Government contracts unattainable if companies are not able to evidence their current and forecast impacts.

Evidence and guidelines act as strong data in arguments for changes. For example, where efforts are being made to reach sustainable targets for all upcoming projects, there is a greater onus on estimators and quantity surveyors to deliver a budget that can be used towards affordable solutions. Software and digital technologies are being readily utilised on construction sites across the UK.

For analysis as well as future planning, ERP software can track, store and share data such as costs and productivity. It also serves as a progressive way to develop a construction company as business-critical decisions can be made with evidence to back them up. As tracking and note-taking are also enabled, this ensures that any changes in data are documented, and can be analysed for correlation, and reasoning.

RedSky helps make construction budgets simple

At RedSky we’re very familiar with the challenges and complex predictions that financial teams and quantity surveyors need to reflect within their budgets. That’s why our ERP software offers you ultimate support when it comes to decision-making and accurate margin reporting. Our team of experts are on hand to personalise our software so it meets your needs.

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